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The financial sector bounces back, and option traders seek protective puts
Beth Gaston Moon is the Senior Editor for the Options News Network. Beth was a member of the research department at Schaeffer's Investment Research for more than a decade. January 26, 2010 8:15 EST Related Symbols: BAC
Financial shares showed a bit of a rebound in Monday’s trading, as the weekend allowed traders to better digest the potential ramifications of President Obama’s proposed changes to the banking industry. The broad market posted modest gains on the day (though the averages closed south of their intraday peaks) and the financial sector gained about two-thirds of one percent.
Bank of America (NYSE: BAC) is one name in the group that typically has the attention of options traders. Yesterday, it also grabbed the attention of Jim Cramer, who expressed bullishness, noting that the banking giant is “…turning the corner.” While the stock moved slightly higher in Monday’s trading – up eight cents, or half a percent, to $14.98 – put sellers came out to express some moderate bullishness.
At the March 13 put strike, more than 10,368 options changed hands compared to open interest of 3,774. Shortly after 2:00 PM Eastern Time, blocks of 5,500 and 4,500 traded hands at 31 cents per share. By the closing bell, these puts were down eight cents with the stock up eight cents. This would imply a 100% delta in the options, but delta in fact is just 18%, so the put should have dropped just one to two cents.
It is therefore safe to say that selling pressure was pushing down implieds on the day and lowering the price of the put options. Implieds declined across the board during Monday’s trading, as the front-month, 15-strike straddle fell from $1.38 at Friday’s close to $1.28 on Monday.
With BAC trading at $14.98, this 13-strike put is out-of-the-money by more than 13%. As long as BAC holds above this strike at March expiration in 53 days, the investor will retain the credit of 31 cents collected. Below breakeven of $12.69, the position begins to lose money. Below the strike, this short put would likely be assigned, requiring the put seller to purchase BAC shares at an effective price of $12.69.
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